Improved forecasts also require a definition of observation error that is consistent with the numerics of the numerical weather prediction model. A perfect measurement or "truth" is defined as the spatial average of the atmospheric velocity field based on the spatial filter of the numerical weather prediction model. This produces two components to the observation error: an instrument error and an observation sampling error that describes the mismatch between the observation sampling volume and the spatial filter of the model. Rigorous calculations of both the instrument error and the observation sampling error depend on the scanning geometry, the system operating parameters, and the spatial statistics of the wind field, i.e., the local turbulence. The scanning Doppler lidar also provides the most reliable estimates of the spatial correlation statistics of the wind field after applying corrections for the spatial filtering by the lidar pulse and corrections for the velocity estimation error. The accuracy of the turbulence estimates is also improved compared with single point measurements such as instrumented towers, sodars, profilers because of the larger sampling volume with increases the number of independent samples of the turbulent processes. Results are presented for the predicted instrument error of a scanning Doppler lidar for typical atmospheric turbulence conditions determined from lidar-derived estimates of the spatial statistics of the velocity. The improvements in observation sampling error and critical unresolved issues for improving the short-term forecasts of wind power are also discussed.